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Can anyone take on the mighty NSE? India's patchwork of exchanges looks to the future

Published in Automated Trader Magazine Issue 26 Q3 2012

Hirander Misra, chairman of Forum Trading Solutions and director of a consultancy, takes a look at the prospects for any other exchange challenging the National Stock Exchange of India. Misra, a co-founder and chief operating officer of Chi-X Europe Ltd, knows all about the battle between newcomers and incumbents. Here he offers his perspective on where the rapidly changing Indian exchange landscape could end up.

Hirander Misra

Hirander Misra

India is home to the oldest exchange in Asia, the Bombay Stock Exchange (BSE), which traces its history to the 1850s and in 1875 became an official organisation known as 'The Native Share & Stock Brokers Association'. The second oldest exchange in India is the Delhi Stock Exchange (DSE), established in 1947. These exchanges have been completely overshadowed by a relatively new entrant established in 1992 - the National Stock Exchange of India (NSE). In two decades it has amassed 80 percent market share in cash equities, with BSE accounting for 18 percent and the rest of India's regional exchanges accounting for just 2 percent.

Competitive Landscape

In Europe we are relatively new to successful competition in equity markets, given that Chi-X Europe was the first to gain tangible market share and challenge the monopolies of the national exchanges. Yet even as we stand today, a combined Bats Chi-X Europe accounts for about 35 percent of FTSE 100 volumes, with the London Stock Exchange (LSE) on around 55 percent.

What has happened in India over the last 20 years with the NSE becoming dominant would be equivalent to the LSE being superseded in a big way by a new entrant, whereas data over the last 12 months suggests that we have reached a point of equilibrium in terms of European market share distribution. If anything, the LSE has gained some market share. Even in the US, when NYSE's market share was eroded, there ended up being an oligopolistic framework where there were a number of players with decent market share (NASDAQ, Bats AND Direct Edge today), rather than a single dominant force.

One theory is that once competition took hold in the West, it resulted in more innovation even from the incumbents, with lower fees and tighter spreads. That in turn led to demand for more such competition. But in India, the concern among some market participants is that the NSE has become too dominant. According to that view, NSE innovations such as order driven trading and central counterparty clearing (CCP), which once drove down costs for participants, are no longer subject to serious competition, hence the fees appear too high given the state of the technology. If you believe the NSE's critics, the so-called "child of competition" has become the incumbent.

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